Under the motto “The euro, how to continue?”, Het Financieele Dagblad – in collaboration with Studio Europa Maastricht – held an essay competition for young people in the autumn of 2021. On 28 December 2021, the newspaper published the best three essays, including an essay by Joep Schoenmakers (23), master’s degree student in international economics at Erasmus School of Economics.
As a child born in 1998, I never paid with a ‘snipe’ (Dutch 100 guilder banknote) or a ‘lighthouse’ (Dutch 250 guilder banknote); instead, it was euro banknotes that were the treasures I found in the envelopes on my birthday. The euro is very precious to me. But the euro is much more than the colourful notes you can use as legal tender at the supermarket. The entire monetary system of the Member States of the Economic and Monetary Union (EMU) runs on this currency. The euro is one of the world’s major reserve currencies.
In contrast to monetary policy, fiscal authority still lies with the individual Member States. Member States use the euro to pursue their fiscal policies. This tension between policy levels puts pressure on the stability of the currency in times of crisis. How can we relieve this tension and make the euro a currency that is fit for the future?
Stable monetary and fiscal policies are needed if we are to guarantee the viability of a currency. Monetary and fiscal authority for countries with their own currencies and national banks is at the same – national- level. That is not the case in the Eurosystem.
The raison d'être underlying the European Union is the internal market, with its four freedoms: the free movement of persons, goods, services and capital. All of these four freedoms benefit from having one currency. An internal market without a common currency is inefficient and unable to compete with other economic powers such as the United States and China.
Having a single currency means that price arbitrage is largely avoided and foreign exporters and importers only have to worry about one price. This facilitates trade agreements, which makes it crucial at a geopolitical level.
For those things to flourish it is crucial that the currency is stable. Keeping the euro stable has required a great deal of effort in recent years. That stability has been under pressure from the ever-increasing sovereign debt of the Member States, each of which is still allowed to pursue its own fiscal policy. And therein lies the rub.
North versus South?
First a note on the European monetary policy. In the discussion on this subject, it is often argued that the southern Member States advocate a policy that is the opposite of the one preferred by the northern Member States. That is not a convincing argument. Each monetary area has its own conflicting interests. For instance, Sicily would want to pursue a different policy from Lombardy, and Bavaria’s preferred policy is not the same as Brandenburg’s.
Solidarity between the different parts of a monetary union is always required, whether they are nation states or not. In a properly functioning system this solidarity works both ways. If the central bank is independent and has leadership that lasts longer than the political cycle, this solidarity is guaranteed. So the monetary policies of the EMU are not the issue. What is lacking is fiscal authority at European level.
The euro is inseparable from the institution that created it: the European Union. In many policy areas, the EU is the legislator, not the national Member State. Whereas a ‘normal’ state, such as the United States, lays down laws and regulations as well as fiscal legislation, the EU only has legal competence, except in limited areas such as agriculture.
“If we are to play a significant role on the world stage, the EU must be able to collect taxes.”
Take, for example, the regulation that 50% of short-haul flights within the EU must be replaced by train journeys. This rule has no teeth if the regulatory authority cannot match the regulation with its own investment budget.
In addition, supranational policies and investments must be made if the internal market is to reach its full potential. As it stands now, these investments are being paid for by individual Member States, without the risk of the currency’s origin, i.e. tax revenue as well as government bonds, being properly distributed across this market.
Role on the world stage
If the EU is to play a significant role on the world stage, there has to be a degree of fiscal authority at European level. That means that the EU must be able to collect taxes. Excise duties, VAT levies and carbon tax are ideal candidates to this end. Further harmonisation of these taxes kills two birds with one stone: it levels out the internal market and raises money for (counter-cyclical) tax policies.
This authority, combined with European bond loans, provides the opportunity for low-risk, EU-wide investment. The precondition for fiscal policy is that it takes place in European policy areas, such as energy, infrastructure and agriculture. An EU-wide elected parliament has the right of veto on these taxes and expenditures.
An EU stability fund, which could be created from these resources, would then ensure that Member States can balance their budgets. The guidelines for budgetary and sovereign debt for the various individual Member States will have to be tightened up in the process.
A question of time
Only if it has this tandem of fiscal and monetary policy will the euro remain stable as a supranational legal tender going forward. If we fail to put this in place, then it is a question of time before one of the Member States collapses under the weight of its huge sovereign debt, dragging down the rest of the Eurosystem in the process. Then, sadly, the guilders will soon be back in the birthday envelopes, worth a fraction of its former value. Happy birthday!